An employee classification error occurs when a company classifies an employee as an independent contractor for tax and legal purposes, but they are, in fact, an employee. A recent study estimates that 10 to 30 percent of employers in the United States misclassify their employees, resulting in billions in lost taxes for US tax authorities.
Here we explain what misclassification of exempt employees is, what the consequences can be for your business and the measures you can take to avoid it.
What is employee misclassification?
Employee misclassification can mean that workers do not receive the benefits they are entitled to. If workers are classified as exempt when they are not actually exempt, this may result in them not being paid the overtime wages they may deserve. Being classified as “exempt” means that employees are not eligible for overtime compensation. In California, a variety of workers—most often salaried employees at the management or executive levels—are classified as exempt overtime. However, if an employee is misclassified as exempt when overtime pay is actually due, this is a case of employee misclassification.
Another form of misclassification occurs when workers are classified as independent contractors rather than employees. Employees are subject to tighter management and often have less freedom in how and when they do their jobs. Instead, independent contractors are essentially self-employed and only outsource their services to businesses. However, employees are typically entitled to many more benefits than an independent contractor.
If workers are classified as independent contractors when they are actually employees, the lack of benefits can be even more dramatic. Independent contractors are not covered by the same labor laws, which means workers may be denied minimum wage, overtime protection, workers’ compensation, family leave, unemployment insurance, union rights, protection against retaliation and much more.
Protect Your Rights in the Workplace
Misclassifying employees as independent contractor’s results in employers being able to avoid paying payroll taxes, withhold wages earned for overtime, and deny meals and breaks to which workers may be entitled. Misclassifying a salaried employee as exempt denies the worker overtime pay and certain other benefits.
In California, all employees are presumed to be non-exempt employees unless an employer can prove that they are exempt or independent contractors. When an employer controls how a person does their job, the person is considered an employee under California law. This is a fact sensitive question. The court will not consider an independent contractor agreement and assume that it is accurate. Instead, it will look at what was actually expected between the hiring entity and the worker to determine the hiring party’s right to control the worker’s actions and whether misclassification of employees has occurred.
What is the minimum wage for full-time employees?
Employers are required to pay employees overtime unless an employee falls under an exemption. For example, workers with certain types of administrative, executive, or professional jobs that involve administrative, intellectual, or creative work that requires independent judgment are exempt. Generally, they must be paid a monthly hourly wage equivalent to at least twice the California minimum wage for full-time employees.
Under wage and hour laws, all employers owe non-exempt employees the duty to pay them at least the minimum wage, give them adequate meals and rest breaks, pay overtime as required by law, keep accurate payroll records, reimburse them for certain businesses. Related expenses, and provide itemized wage statements. An employer who engages in employee misclassification may be subject to a claim for unpaid wages, fines, civil penalties, and attorney fees. In California, if she was paid less than minimum wage, she is entitled to liquidate damages equal to the amount of her lost wages. An employer also owes a fine of one hour’s pay at the employee’s regular rate of pay for each day worked in which a meal or rest break was not provided.